Asia eyes more Saudi oil despite fractious OPEC meet

A driver pumps petrol into his car at a petrol station in Brussels March 8, 2011.
REUTERS/Yves Herman/Files

By Simon Webb and Judy Hua| BEIJING/SINGAPORE

BEIJING/SINGAPORE Asian refineries are confident Saudi Arabia will ensure no shortage of oil supply to meet rapidly rising demand this year despite OPEC's failure to agree an output increase this week.

But demand in the region could suffer in the long term if the failure of the producer group to send a clear signal to markets keeps oil above $100 a barrel.

Asia, led by China, is driving the global increase in oil consumption, so higher Saudi supply would benefit regional refiners. The Paris-based International Energy Agency (IEA) expects Asia to burn 900,000 barrels per day (bpd) more oil in 2011 than 2010, over 70 percent of the 1.29 million bpd global demand growth forecast for the year.

"We are not concerned about a shortage of supplies," said a Chinese crude trader at a big state-run oil refiner. "Our demand has been met over the past two years even when OPEC cut supplies and changed crude grades they supplied."

Saudi is China's top supplier, and in the first four months of 2011 is already up over 27 percent on the year at 1 million bpd.

OPEC and non-OPEC oil producers are competing hard for the market in the world's second-largest consumer. Riyadh, unwilling to give up ground, supplied Beijing with more oil even as the kingdom instigated OPEC's record supply cuts as recession engulfed many of the world's major economies in 2008-2009.

China is expected to bring online around 500,000 bpd of new refining capacity this year.

Saudi Arabia failed to convince all of OPEC's members on Wednesday to lift output to meet the expected demand rise in the rest of 2011.

Riyadh's Oil Minister Ali al-Naimi made it clear when he left the meeting that the kingdom would meet requirements regardless.

"The market is not going to see any shortage because we couldn't reach an agreement in this meeting. We are willing and we are able to deliver what is needed," said Naimi.

Saudi may be less fettered in boosting supply than it would if it had to pay lip service to an OPEC target. It is the only member of OPEC with significant spare capacity so is anyway the only producer able to pump a lot more oil quickly.

"The kingdom is now free to increase production as it sees fit -- likely at a higher level than it would have been willing to agree to in exchange for OPEC solidarity," consultancy PFC Energy said in a research note.

"There is a glut in Russian and Iraqi crude supplies in the market, making it difficult for Saudi to sell more spot cargoes," said a crude trader at a Chinese trading house.

"China may buy more crude in the second half but that depends on oil prices."

While traders were confident that supplies would be sufficient, there was still concern about the impact of high prices on demand and growth in a region where governments are battling inflation.

"The big economies here -- China, India, South Korea -- are all battling inflation, and inflation slows down growth," said one senior oil trader.

"Now if we start to see prices running up as a result of this OPEC meeting then you are adding to that pressure on inflation."

OPEC had missed an opportunity to send a signal to both consuming governments and investors in New York and London oil markets that could have dampened both supply concerns and $100 oil prices, they said.

"The issue is more about political implications of a dysfunctional OPEC rather than any practical issue over impact on physical supply as such," said Tilak Doshi of the Energy Studies Institute in Singapore.

Consuming nations said on Wednesday they would tap emergency stocks if Saudi Arabia failed to pump more oil quickly.

The government of India, the world's fourth-largest importer, said OPEC's failure to agree output would hurt Asian economies which already spend heavily on fuel subsidies. A high international oil price means a bigger bill for India's treasury to finance subsidies.

"We are deeply concerned at this highly negative development," Oil Minister S. Jaipal Reddy said on Thursday. "Our need, like many of the Asian economies, will be rendered more vulnerable to this kind of oil shock."

A big increase in Saudi supply would eat into its spare capacity to deal with any supply outages. That could mean a price rise despite the kingdom meeting physical demand as investors price in the risk the kingdom would struggle to deal with any escalation in political unrest across the Middle East.

(Additional reporting by Nidhi Verma in New Delhi, Osamu Tsukimori in TOKYO, Meeyoung Cho in SEOUL and Luke Pachymuthu, Francis Kan, and Manash Goswami in SINGAPORE; Editing by Michael Urquhart)

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